Denny's Corp (DENN) 2011 Q4 法說會逐字稿

Good afternoon. My name is Susan, and I will be your conference Operator today. I would like to welcome everyone to the Denny's fourth-quarter and full-year 2011 earnings release call. (Operator Instructions) Whit Kincaid, Director of Financial Planning and Analysis and Investor Relations, you may begin your conference.

Thank you, Susan. Good afternoon, and thank you for joining us for Denny's fourth-quarter and full-year 2011 investor conference call. This call is being broadcast simultaneously over the Internet. With me today from Management are John Miller, Denny's President and Chief Executive Officer, and Mark Wolfinger, Denny's Executive Vice President, Chief Administrative Officer, and Chief Financial Officer. John will begin today's call with his introductory comments. After that, Mark will provide a financial review of our fourth-quarter and full-year results. I will conclude the call with a review of Denny's 2012 full-year guidance. As a reminder, we will be filing the 10-K by the due date of March 12.

Before we begin, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company knows that certain matters to be discussed by members of Management during this call may constitute forward-looking statements. Management urges caution in considering its current trends and any outlook on earnings provided on this call. Such a statements are subject to risks, uncertainties, and other factors that may cause the actual performance of Denny's to be materially different from the performance indicated or implied by such statements. Such risks and factors are set forth in the Company's most recent annual report on Form 10-K for the year ended December 29, 2010, and in any subsequent quarterly reports on Form 10-Q. With that, I will now turn the call over to John Miller, Denny's President and CEO.

Thank you, Whit. Good afternoon, everyone. I started at Denny's a little more than 12 months ago. I have since gained a thorough understanding of the Denny's brand and our customers, in addition to a more thorough understanding of the family dining segment, which is new to me. I have spent as much time on the road as possible getting to know members of our entire organization, including franchisees, field leaders, restaurant employees, and a number of our key vendors, as well. Before starting, my initial sense was that many people, including customers and investors, saw Denny's as a brand that had not captured its full potential. I am pleased to tell you that we are on our way to becoming a much more competitive player in our segment and in the industry.

Currently, we are focused on three main objectives -- first is executing against our America's diner always open position, which provides the promise of everyday value -- cravable, indulgent items served in a come-as-you-are, friendly, and inviting atmosphere. Second, continuing the growth of the Denny's brands through traditional and non-traditional venues, both domestically and internationally. Third, growing earnings and free cash flow through our franchise-focused business model. This enables us to continue on our steady track record of strengthening our balance sheet, supporting franchise growth, and returning value to our shareholders. We have made significant improvements in all these areas, which helped make 2011 a successful year for Denny's.

We are pleased to report that we finished 2011 with our third consecutive quarter of both positive franchise and Company same-store sales, even in the face of a challenging economic environment for our customers. Most notably, we achieved positive same-store sales and guest counts for the full year, which is the first time that all of our same-store metrics have been positive since 2004. We now have four, going on five, quarters under our belt with our America's diner always open brand-positioning efforts. With this as a strong foundation and framework, we believe we are at the beginning stages of effectively broadening our consumer base, to guests craving their diner favorites versus the historical more narrowly focused breakfast-all-day focused platform.

In addition, we are building frequency among our tried-and-true loyal customers looking to enjoy interesting new offers on a more regular basis. Our success is being achieved through consistent brand execution, leveraging our three primary marketing strategies, delivering everyday affordability, creating compelling limited time only product offerings, and driving sales beyond breakfast. We will continue to refine and evolve our marketing efforts to the needs of our guests with each passing quarter. During the fourth quarter, we had significant new product news, featuring our Let's Get Cheesy limited time offer campaign in October, and our final marketing module of the year, the Taste of the Holidays.

We are focused on offering our guests motivating, healthy products for all day parts, while combining affordable starting prices with compelling diner add-on opportunities. Even with all the new product news, our guests continued to desire value, and our everyday affordability strategy continues to work hard for us. This is primarily driven by our $2 $4 $6 $8 value menu, which continues to mix in the high teens; although it did decrease slightly from the third quarter, as guests traded to the holiday Build Your Own Slam -- a compelling value offer in and of itself. Denny's promise of everyday value has been a key part of our improvement guest traffic, and we continue to leverage this tool with new product news supported and emphasized through broadcast and other forms of media.

In 2012, we will continue to build on the improvements we have made, while listening to our consumers along the way. To that end, we have planned five new marketing modules for the year, which will continue to focus on everyday affordability, premium limited time only offerings, and new menu products that include both breakfast and beyond breakfast diner classics, leveraging our strength as America's favorite diner. Since our customers are watching their waistlines and their wallets with extra scrutiny this time of year, our first campaign of 2012, which launched in early January, called even more attention to our new Fit Fare options that were introduced last June, as well as a timely emphasis on our $2 $4 $6 $8 everyday value menu.

Consistent with our diner theme, a whole lineup of Sizzlin' Skillets were introduced as our limited time only offers. In addition, our new core menu contains new classic diner offerings, such as our slow-cooked pot roast, spaghetti and meatballs, a bacon lover's BLT and a Fit Fare veggie skillet. The $2 $4 $6 $8 value menu is updated and now includes a chicken spinach salad for $6 and a warm s'more cookie skillet a la mode for $4. As you can see, we will continue to offer new products to our customers according to their interests and in keeping within the heritage of an American diner.

Turning to unit growth -- we opened 14 franchise units in the fourth quarter, including the final Flying J conversions site. We opened 62 units in 2011 and 203 units in the last two years, with a net system growth of 27 units in 2011 and 134 units in the last two years. The Flying J conversion program, which added 123 units to the system, was a tremendous opportunity for the Denny's brand and to our franchisees. It provided a significant increase to our total revenues and profitability. We continue to be very excited about our partnership with Pilot Flying J travel centers, and anticipate continued travel center development through either new Pilot and Flying J openings, potential future Pilot acquisitions, or new franchise growth through conversions of restaurants at mom-and-pop travel centers.

We are placing more time and resources toward building our unit development pipeline in the US and abroad, and continue to work closely with our franchisees and licensing partners to grow the Denny's brand through traditional and non-traditional venues. We are quite pleased with the 11 university units that we have opened since the beginning of 2010, and the attractiveness of the Denny's brand in new distribution points. We have expanded our team to help us further penetrate these non-traditional market opportunities with our existing licensees Compass, Sodexo, and ARAMARK, while developing new partnerships for potential units on military bases and airports. We believe that the Denny's brand can do very well outside of the United States, as evidenced by the success of our 60 units in Canada and two units opened with our newest partners in Honduras.

At the end of 2011, we signed two smaller development deals to open up a total of 15 units in Mexico and the Dominican Republic, and are looking forward to opening our first locations in those new opportunities in 2012. Since we are taking a franchise-focused approach outside the United States, we are working diligently to find the right, well-capitalized, and experienced international partners who can grow quickly. Although we are a brand that is almost 60 years old, with almost 1,600 units in the United States, we believe there remains substantial opportunity to grow our traditional domestic footprint. Recently, we announced a $100 million loan program with two lending partners, to offer third-party lending to franchisees who want to build new units in the United States.

We have a heavily concentrated store base, with about 50% of our units in four states -- California, Texas, Florida, and Arizona. The loan pool allows us to support franchisee growth in new and underpenetrated geographies without lending to them directly. We have agreed to backstop up to 12% of the loans under the program to facilitate growth in these areas. This loan program is made even more attractive in combination with our incentives toward multi-unit development, which includes lower front-end fees, lower royalties, as well as assistance and support for site development. As a result, Denny's is recognized as one of the most attractive franchising opportunities in the United States, as noted by our top-10 ranking on Entrepreneur magazine's Franchise 500 list.

We believe we can continue to attract new franchisees to the system, while also encouraging our existing franchisees to grow the brand. Although the restaurant industry has faced challenging times over the past few years, with headwinds from a difficult consumer economic environment, inflationary pressures, and intense competition, Denny's has been able to grow sales, profitability, and free cash flow. This has enabled us to continue making investments in the brand, while strengthening our balance sheet through debt repayment and returning cash to our shareholders through our share repurchase program.

My first 12 months has confirmed what I already knew to be true -- Denny's is a great brand, with an energized group of franchisees, who have talented and dedicated employees, and a loyal customer base, from which I am confident we can continue to expand. We remain focused on differentiating Denny's in a crowded marketplace, and executing successfully on our strategies to further strengthen our position as America's favorite diner in 2012 and beyond. With that, I will turn the call over to Mark Wolfinger, Denny's Chief Financial Officer and Chief Administrative Officer.

Thank you, John, and good afternoon, everyone. Our fourth-quarter performance was highlighted by positive same-store sales at both franchise and Company units, with an 86% increase in adjusted income before taxes and a $17.7 million increase in free cash flow. Joined by our franchise-focused business model, our growing profitability and free cash flow has enabled us to further strengthen our balance sheet through debt repayments, while also returning value to shareholders through share repurchases. In the fourth quarter, Denny's opened 14 new franchise units, closed 6 franchise units, and sold 17 Company-owned units to franchisees, leading to net system growth positive 8 units this quarter.

In the fourth quarter, system-wide same-store sales increased 1.6%. Same-store sales at franchise restaurants increased 1.8%, and same-store sales at Company restaurants increased 1%. This is the third consecutive quarter that both Company and franchise same-store sales have a positive. Looking at the details for Company sales performance -- guest check average increased by 0.3 percentage points. The higher guest check average was driven by a core menu price increase implemented in June, partially offset by an increase in store-level discounts compared to the prior-year quarter.

In the fourth quarter, Company same-store guest counts increased 0.7%, contributing to a 0.5% two-year, same-store guest count increase, which demonstrates continued same-store improvement beyond what was generated by the relative improvement in weather compared to the prior-year quarter. Denny's total operating revenue, including Company restaurant sales and franchise revenue, decreased $5.7 million compared to the prior-year quarter, primarily driven by a decline in Company restaurant sales in the quarter. The decline in Company restaurant sales reflects the continuing impact of our franchise growth initiative, or FGI, as Company sales decreased $5.3 million, or 5%, primarily due to 17 fewer equivalent Company restaurants, compared with the same period last year. This decrease was partially offset by the 1% increase in same-store sales for the quarter.

I will now turn to the quarterly operating margin table. The fourth-quarter Company restaurant operating margin of 12.8% represents a 0.5 percentage point increase compared to the prior-year quarter, and was primarily impacted by the following items -- product costs increased 0.1 percentage point to 25.1% of sales, primarily due to the impact of increased commodity costs. Payroll and benefit costs decreased 1.5 percentage points to 40.4% of sales, due to improved scheduling of restaurant staff; selling at lower-performing units through FGI; and a $500,000, or 0.5 percentage point, of unfavorable workers' compensation claims development in the prior-year period.

Occupancy costs increased 0.6 percentage points to 6.9% of sales, primarily due to favorable general liability claims and property tax accruals in the prior-year quarter. Other operating costs increased 0.3 percentage points to 14.8% of sales, driven by a 0.6 percentage point increase in marketing expense accruals and a 0.5 percentage points increase in legal settlement expenses related to favorable claims development in the prior-year quarter. These increases were partially offset by the reduction in new store opening expenses resulting from opening 14 Company-owned units in the prior-year quarter.

In summary, the gross profit from our Company operations decreased by $200,000 on a sales decline of $5.3 million. For the fourth quarter of 2011, Denny's reported franchise and license revenue of $31.8 million compared with $32.2 million in the prior-year quarter. The $400,000 decrease in franchise revenue was primarily driven by a $1.7 million decrease and initial and other fee revenue associated with opening 36 Flying J conversion units in the prior-year quarter, offset by a $1 million increase in royalties from 61 additional franchise equivalent units and the effects of higher same-store sales in the current-year quarter.

Franchise operating margin increased $200,000 to $20.9 million in the fourth quarter. This increase was primarily driven by the $1 million increase in royalties, $600,000 increase in occupancy margin, and a $300,000 decrease in direct franchise costs, primarily offset by a $1.7 million decrease in initial and other fee revenue. Franchise operating margin as a percent of franchise and license revenue of 65.5% represents a 1.2 percentage point increase compared to the prior-year quarter. The franchise side of our business contributed 62% of the total operating margin in the fourth quarter, which is $8.3 million more than our Company restaurants.

The income shift to a franchise-focused business model allows us to increase the predictability of our earnings. For the quarter, adjusted EBITDA margin as a percentage of total operating revenue was 15.3%, an increase of 4.0 percentage points compared to the prior-year quarter. Total general and administrative expenses for the fourth quarter decreased [to] $1.3 million from the prior-year quarter. General and administrative expenses, excluding share-based compensation, decreased [to] $1.5 million, primarily due to a decrease in performance-based compensation accruals, relative to the prior-year period. Depreciation and amortization expense declined by $1.1 million compared with the prior-year quarter, primarily as a result of the sale of Company-owned restaurants over the past two years.

Net operating gains, losses, and other charges, which reflect restructuring charges, exit costs, impairment charges, and gains or losses on the sale of assets, decreased to $4.6 million compared to the prior-year quarter, primarily driven by the lower gains on the sale of assets. These gains -- the gains on sale of assets were $3.8 million lower, due to a decrease in gains associated with the sale of Company-owned units to franchisees, and the sale of real estate in the prior-year quarter. We sold five Company-owned Flying J conversion units to franchisees in the fourth quarter. All told, we have sold 6 of the 29 Flying J conversion units opened by the Company to franchisees.

Impairment charges were $1.5 million higher than the prior-year quarter, primarily driven by the two fast casual Cafe R&D units opened in the fourth quarter of the prior year. Operating income for the fourth quarter decreased to $2.3 million from the prior-year quarter to $11.8 million, primarily due to the decrease in net operating gains, losses, and other charges mentioned previously. The low operating income interest expense for the fourth quarter decreased $1.8 million, or 28%, to $4.7 million -- a result of the lower interest rates under our repriced credit facility and a $41.5 million reduction in total gross debt over the last 12 months.

In the fourth quarter, we recorded an $89 million net deferred tax benefit from the release of the substantial portion of the valuation allowance and on certain deferred tax assets. This release is primarily based on our improved historical and projected pretax income. We paid $1.1 million in cash taxes in 2011, which were reduced by the utilization of certain net operating loss carryforwards. We will continue to utilize additional net operating losses and income tax credit carryforwards to eliminate the majority of our cash taxes for the next several years.

We believe the best measure of the ongoing earnings of our businesses is adjusted income before taxes. In the fourth quarter, adjusted income before taxes was $9.5 million -- an 86% year-over-year increase. And for the full year, adjusted income before taxes increased 37% to $37.3 million, from $27.3 million in 2010. Moving on to capital expenditures -- our full-year cash capital spending was $16.1 million, a decrease of $11.3 million compared to the prior year. This decrease was primarily driven by lower new construction expenditures, reflecting the impact of opening 24 Company-owned units in the prior year. In addition, we completed 49 facility refreshes at Company-owned units in the prior year.

Our franchisees refreshed or remodeled 200 units in 2011, completing our facility refresh program. More than 60% of our system is on the current scheme, including almost 250 new units opened in the last three years. Starting in 2012, we will return to our traditional seven-year remodel cycle, and focus on full-scale remodels. The transition to a franchise-focused business model and improved operating performance has allowed us to generate a significant improvement in free cash flow. We generated $12.7 million of free cash flow in the fourth quarter -- an increase of $17.7 million, compared to the prior-year quarter.

And for the full year, our free cash flow more than doubled, as we generated $47.6 million in 2011 compared to $22.4 million in 2010. The free cash flow has allowed us to continue to strengthen our balance sheet, as we repaid $12 million in term loan debt in the fourth quarter, bringing our total debt repayment for the year to $42 million. We have reduced total debt by $331 million, or 60%, since early 2006, and now have outstanding term loan debt of $198 million. Our total debt to adjusted EBITDA ratio is now 2.69 times, which is almost a full turn lower from the 3.57 times ratio at the end of 2010.

By achieving the 2.75 times threshold on our debt agreement, we have increased the flexibility for our use of cash. In addition to repaying debt, we have been able to return value to shareholders through share repurchases. We repurchased 634,000 shares in the fourth quarter, bringing the total shares repurchased under the 6 million share stock purchase program to 3.7 million shares. We maximized our share purchase availability in 2011 and purchased 5.7 million shares. When you include the 3 million share stock repurchase program approved in November of 2010 and completed in the first quarter of 2011, we have repurchased a total of 6.7 million shares in the last five quarters.

We will continue to balance the use of our free cash flow between debt repayment and share repurchases, as we seek to both make us a stronger franchisor and return value to our shareholders. In the next two years, we are targeting to move our total debt ratio below the 2.25 times threshold in our debt agreement, which will ultimately allow us to maximize our cash use options, as permitted in the agreement. That wraps up my review of our fourth-quarter and full-year results. I will now turn the call over to Whit, who will speak to our 2012 guidance.

Thank you, Mark, and good afternoon, everyone. I would like to take a few minutes to expand upon the business outlook section in today's press release. The following estimates for full-year 2012 are based on 2011 results and Management expectations at this time. We expect full-year franchise and Company restaurant same-store sales to perform between flat and positive 2%. We remain cautious of the seemingly choppy economic recovery and its impact on our customers. Regardless, we believe that we have the right strategies in place to build on the momentum we established in 2011.

We expect commodity inflation to continue to impact our business in 2012. In 2011, commodity inflation was a little more than 5%, with significant increases in cooking oils, coffee, orange juice, pork, and eggs. Based on our current thinking, we believe that commodity cost pressures will be in the 3% to 5% range this year. As a result of the commodity increases we are seeing, we took a loss and 1% price increase with our new January core menu. This is in addition to the less than 1% price increase we took in June of last year, when we lost our new core menu.

We expect to open between 45 and 50 new restaurants in 2012, which is a 15% to 28% increase compared to our 2011 new unit openings, without the 23 Flying J conversion units. Almost all of these units will be opened by our franchisee and licensee partners. We expect more than two-thirds of our franchise unit openings in 2012 will come from our pipeline of 217 domestic unit commitments. The remaining portion will come from non-traditional sites, international locations, and travel centers. We are currently expecting to open one more Company-owned unit this year, as we have secured space in the Neonopolis development in downtown Las Vegas.

As many of you know, Denny's does extremely well in the Las Vegas strip, where we currently have five Company-owned units that generate some of the highest unit sales volumes in the entire system. We currently expect to achieve net system unit growth of at least 10 units in 2012, as we anticipate that between 30 and 35 system units will close this year. This is around 2% of the system, and is consistent with what we have seen over the last five years. Our adjusted income before taxes, adjusted EBITDA, and free cash flow guidance is presented based on metrics which we detail in our earnings releases.

Adjusted income before taxes is our internal profitability metric, which we believe most closely represents our ongoing business income. We also utilize adjusted EBITDA, as it is the metric that most closely aligns with the calculation of our debt covenants under our credit facility. The free cash flow metric reflects the positive impact of our franchise-focused business model. Please refer to the historical reconciliation of these metrics to net income in today's press release. Our adjusted EBITDA estimate for 2012 is $80 million to $84 million. It is important to note that the FGI refranchising program that Denny's began in 2007 has contributed to our rising adjusted income, but has placed downward pressure on EBITDA for the past four years.

We anticipate completing this program by the end of 2012, by selling 25 to 30 units to franchisees, as we continue to streamline our Company geographic footprint and stimulate new unit development. Our adjusted income before taxes is expected to be between $41 million and $45 million, which is an annual growth of 10% to 20%. Key contributors to this increase include lower interest expense, positive impact from our FGI program, an increase in same-store sales, and non-incurring investment costs associated with Company-owned Flying J conversions. We expect net interest expense to decline in 2012 and be between $16 million and $17 million, with net cash interest expense to be between $13 million and $14 million.

This decrease was driven by the $42 million of term loan repayment in 2011 and the repricing of our credit facility, which occurred in the first quarter of 2011. Turning to capital expenditures -- in 2011, our cash capital expenditures was $16.1 million, which included $6 million spent on the Company-owned Flying J conversions. Our estimate for 2012 is between $15 million and $16 million, which includes the cost of building the new Company-owned unit in downtown Las Vegas and additional remodel capital as we get back into our full remodel cycle.

Since we released a substantial portion of the valuation allowance on certain deferred tax assets, we currently expect to have an effective tax rate between 30% and 35% in 2012. As Mark mentioned, we will continue to benefit from certain deferred tax assets, and expect our cash taxes to be between $2 million and $4 million in 2012. Based on these components, our free cash flow guidance is $48 million to $52 million, which reflects a modest year-over-year increase compared to the $47.6 million of free cash flow we generated in 2011. That wraps up our guidance commentary. I will now turn the call over to the Operator to begin the Q&A portion of our call.

(Operator Instructions) Michael Gallo.

Congratulations on another good quarter. My question is on the international front -- I know you have talked about the opportunity there. I was wondering if you are actively recruiting franchisees, and what we should expect to see in terms of the pipeline there, and whether you have any additional SG&A costs as a result of that, embedded in your 2012 plan. Thank you.

We do have, as we said in the comments, that we have made -- stepped up our investment. We believe there is tremendous potential; and to get rocking, we want to make sure -- and there is considerable interest. But we want to make sure we have selected the right partners, with the right capital, the right infrastructure, the right will to do the things to succeed in the restaurant business. And so, we are -- I would say we have stepped up our efforts to secure a more solid pipeline and future for international development for Denny's. As far as the pipeline itself, I think I will leave that to Whit or Mark to speak specifically about the development pipeline and how that is coming along.

Thanks, John. Mike, we have -- currently have 39 unit commitments in our international pipeline, 10 of which have been opened to date. And that includes -- we mentioned the new smaller agreements that we signed for additional units in Mexico, Dominican Republic, also includes units in -- additional units in Central America and Canada, as well.

Okay, thank you.

[Will Slaba].

Congrats on the quarter. Wondered if you could talk about the success of promotional strategies throughout the holidays -- your LTOs, the Arthur Christmas promotion, just how those performed relative to expectations internally there. And then, on the back of that, if you would just touch on the success of LTOs -- as they have gone quarter to quarter, it feels like they have been building quarter to quarter, as far as the success goes. So, I wondered if you would touch on those couple of points.

Great question. And I think, indeed, your instincts are right. There's a couple of things that have happened -- the diner positioning seems to have paved the way for a different type of consumer response. And so, as the year has unfolded, you will recall -- just to refresh all other listeners, we started out with the $2 $4 $6 $8 value proposition in the first quarter of 2011. We built on that with Baconalia, and -- where we were a little bit more daring to move -- to clearly stay with our breakfast platform, but to move away from breakfast and have more daring beyond breakfast initiatives. And then, by the time the third module rolled around with Tour of America, we had some very solid breakfast offerings, but -- we had a Midwestern meat and potato sandwich, and a number -- and shakes, smoothies, burgers, core menu items, diner items, they started to move up.

And we started to see some mix migration in lunch, dinner, and late night along those lines. Then, Let's Get Cheesy seemed to really cap it all, where in a value back-to-school time of year, we expected $2 $4 $6 $8 to dial up a little bit. So, we obviously kept it in our media mix, but dialed it back just a touch; and we saw add-on sales and what we say are diner-like items really take off in a much more substantial way than they had before. And then, in going into the holidays, I think people take a break, they go back to tradition. We sold a lot of Build Your Own Slams and turkey dinners.

So, I would say that from our franchise community to the consumer, people are getting it. We are starting to get a lot of blog -- the customer comments are qualified with -- hey, I have been a Denny's fan for years, I love your diner positioning; or making suggestions on what goes on a diner menu. So, we are getting a lot of interest from consumers along these lines, and each successive module is gaining some traction.

Conrad Lyon.

I really like what is happening with the capital structure. And I wanted to ask a question or two -- just what is happening with free cash flow, or how we really should expect it to flow over the next couple of years here. So, CapEx -- looks like it is stabilizing up to $16 million run rate, and I think -- I'm not sure who it was, Mark or Whit, who said that you are reverting back to your traditional remodel program. Which -- I might suspect that means we will see a more consistent type of CapEx spending, going forward. That being said, you are still getting some nice incremental increases in free cash flow, and so therein lies my question, is -- what should we expect in free cash flow increases, going forward? Is it mimicking along with some more scale with the FGI program? Knowing that it's winding down, but more so along the line of how sales progress?

On the free cash flow piece, I think it's interesting -- when you look at the components of our free cash flow, obviously, as you just mentioned, FGI is winding down the sale of the Company units. So, obviously, the organic part of free cash flow is coming through now. As it relates to CapEx and your question around CapEx, obviously we spent in the $16 million range in 2011, and Whit provided the guidance in that same type of range -- again, I think it was $15 million, $16 million. So, I think as we have said, longer term, as we transition to this franchise model, that the CapEx portion of that model is sort of in that -- call it mid-teens type of category.

And as far as the use of the free cash flow, obviously I made some comments in my script about the continued focus on debt reduction, and basically going past or coming through to that 2.25 type of leverage from where we are today; we were at 2.69 at the end of 2011. I mentioned that in the next two years, we are targeting to be under the 2.25 leverage piece. But at the same time, we are going to continue to focus on using a piece of our cash as it relates to the stockholder side, and continue to focus on share repurchase.

Got you. Okay. Just one follow-up question on the development schedule with the units -- any sense -- I know it's going to be, I think, probably, a different -- all sorts of different type of units. But is there a sense of the average square footage of what gets developed? By the franchisees?

Sorry, Conrad, are you asking about within the US?

Yes, yes, sorry.

I think we are continuing -- I think as we look at it, there's a couple different components of development. If you were going to go on campus, you would see all kinds of different square footage amounts on campus -- again, coming down to the space that is available from the universities at that point in time -- and different operating models on campus. As it relates to what we have seen in the domestic US, when you look at what the last year or so has been from a development standpoint -- a couple comments. One, more conversions of existing real estate space. And probably from a square footage standpoint, probably in the mid-4,000s range. So, call it low 4,000 square feet up to 4,500, 4,600 square feet, 150-seat type of restaurants.

Got you.

And we continue to see opportunities there on the domestic, sort of traditional front along those lines.

Got you. Last question -- just curious how big that Vegas restaurant you are building is going to be?

It's bigger than that. (laughter)

Okay. Fair enough. All right, thanks.

I mean, I did not mean to be -- it's an odd shape and an odd opportunity. And so, it creates extraordinary challenges and it costs above the normal per square foot cost. But it is one of those opportunities to really have some great exposure in Vegas, provide this international window to the United States. It's extraordinary, and it helps our brand in a number of ways. It has even been suggested to our Marketing department the whole thing should be in the ad fund, but I don't think that was a popular view for the Marketing department. (laughter) But it's about, let's say, 25% larger to one-third larger, somewhere in that range.

Yes, what we have seen in Vegas -- this is Mark. You have heard us say this before, to John's comments, is that as it comes to the Vegas area, the Vegas strip, certainly, from a Company-operated performance standpoint, the volumes are very strong on the Vegas strip. And so, from the standpoint of seating capacity and square footage, we obviously do very well and can leverage our square footage in that area quite strongly.

Okay, thanks.

(Operator Instructions) Sam Yake.

I will echo the congratulations on the good quarter.

Thank you.

I'm wondering -- you mentioned about the -- you are able to avoid the cash taxes. I'm wondering what your best estimate is, as to when you expect cash taxes to significantly ramp up?

It was a comment I think I briefly made in my script, when I talked about the deferred tax asset. And I think Whit certainly gave some specific guidance on cash taxes for 2012, but -- that right now, we are anticipating that for the next several years, we don't anticipate paying a high amount of cash taxes.

You are not comfortable giving a year when you think that will change?

Again, I think we are comfortable with what I said in my script, and that is the next several years. So, not without a specific time frame attached to that.

Okay, fair enough. And one other question -- I was surprised with your pace of refranchising activity in the quarter. And I'm wondering -- if you can get good prices for Company-owned restaurants, might you go beyond your 90/10 goal, which you are almost at now?

The 90/10 goal, obviously, is a number we have guided to for a while. And by the end of this -- 2012, we expect to be there. And then, on a go-forward basis, in that mid-teen CapEx range, you would expect low unit counts for Company development. So, [it sort of looked] naturally, somewhere out there, to go beyond that number. So, there is no particular reason to target a number beyond that, when you look at the core Company restaurants remaining, their higher sales, top trade areas; and we think with the franchisee/franchisor relationship, there is tremendous benefit to having not just a toe in the water, but skin in the game, so to speak, as an operator in the system. So, I would say at this stage, there is not a beneficial reason to go much beyond what we currently guided.

Right. I would agree with John's comments on that, Sam. And again, I think that 90/10 split is going to move around a little bit, based on -- obviously, as the development -- new unit development takes place, primarily on the franchise side of the business. But it's certainly the targeted area, again, to John's point, by the end of 2012 time frame.

Okay, thanks. And I would just end with a comment -- you have done a really great job with your capital structure, and I wish you continued good fortune.

(Operator Instructions) Mark Smith.

Just a couple housekeeping questions from me -- first, when do we get a 53rd week?

2014.

Okay. Second, do you have the exact numbers -- I know somebody went through it in the script, but the breakdown of the operating gains, losses, and other, on impairments and what your gains are?

Yes, so, Mark -- for the impairment, it was $1.8 million in the quarter. The restructuring and exit cost portion was actually a gain of $125,000. And then, the gain on the sale of assets portion was a gain of $446,000.

Perfect. And then, last question -- can you give us an update on commodities contracts, on where you stand today?

Yes, Mark. We mentioned the 3% to 5% range, so before the end -- within that range for 2012, it -- we are 50% contracted for the year. We also don't expect to lock in to more than 75% of our needs for this year. Really, for us, pork, ground beef, and dairy, which make up more than 30% of our market basket on a combined basis, are the biggest areas of exposure for us right now. And we don't expect to be able to walk into pork, which was something we were able to do for a portion of last year's needs. So, obviously, we are hopeful. Given the volatility that we have been able to -- we would like to see the lower end of that range, if not below. But given all of this volatility and uncertainty in the markets, we remain pretty cautious around commodities, which is why we went ahead and took a modest amount of pricing with our January menu launch.

Thank you.

You have no further questions at this time.

Thank you, Susan. I would like to thank everyone for joining us on the fourth-quarter call today. We look forward to our next earnings call to discuss our first quarter of 2012 results. Thank you, and have a great evening.

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